Phil Newton, department director, pegged his initial projection at rate increases of 4.7 percent in May 2013 and the same hike again in 2014. He quickly pointed out that these would be the first increases since early 2009.

Some of the news was good. Newton expects a 1 percent increase in customer base and the utility continues to draw electric customers away from Consumers Energy because of lower rates, he told the Bay City Commission at tonight's Finance and Policy Committee work session for the 2012-13 budget.

However, the 2012-13 budget has a 15.4 percent increase and that has to come from somewhere. The total budget of $40.6 million includes $3.3 million for power supply, a 17.6% increase, and $3.7 million in generation upgrades.

Besides "huge" increases in transmission costs, Bay City also will see costs incurred elsewhere passed along. For example, as one of 14 municipalities in the Michigan Public Power Agency, the city is part owner of what it calls the Campbell plant. That coal-fired plant is facing upgrades to comply with environmental regulations, and is expected to increase its rates about 29 percent.

Bay City, which generates about 30 percent of its own electricity, also is facing upgrades to its own equipment. Some of that, Newton said, is because controls for plants built in the 1980s and early 1990s are becoming obsolete.

Changes in environmental regulations are in play here, too, though. Four units — two at Water Street and two at the substation at Fisher and Henry — need new exhaust stacks and catalytic converters. Without compliance issues, Newton said, the city likely would have tackled one unit per year for four years rather than doing all four at once.

That work, estimated at $3.7 million, will be paid for by bond. "Our guess is we're going to borrow the money for 15 years and that will extend the life of the plant for 20 years."

Even though the upgrades would be paid for by issuing bonds, that debt will have to be repaid, which is part of the reason for the proposed rate increases.

The utility's cash reserve also is a concern. Newton said he has been told it should be around $10 million, but instead it is about $4 million. "I believe that will be part of the discussion before any rate increase."

Utilities tend to have large cash reserves because of the potential for major losses from storms.

City Manager Robert Belleman said the utility used to have a $14 million to $16 million cash reserve, but has been keeping it down to keep rates down.

The proposed budget also reflects increased overtime costs during the planned upgrades, Newton said, rather than bringing in an outside firm. "Our own staff is a great deal cheaper."